Question: In the context of a one factor APT model, you are looking at the following three portfolios: Portfolio Expected return Factor sensitivity 0.8 0.59

In the context of a one factor APT model, you are looking

In the context of a one factor APT model, you are looking at the following three portfolios: Portfolio Expected return Factor sensitivity 0.8 0.59 1.39 A B C 8 14 13 If you construct a composite portfolio "D" from B and C that has the same factor sensitivity as portfolio A, (similar to previous problem) and then go long D and short A (or the other way around) to create a riskless arbitrage profit, what would be your expected return? Enter return as a percentage. Hint: Solve for the weights within portfolio D. Then using those weights find the expected return on portfolio D (which is the weighted average of the component assets). Finally when you short one and long the other (you would obviously choose to short the one with the smaller return), your expected return would be the difference between the two returns.

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